BILLING CODE: 4810-39-P
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 356
Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and
Bonds (Department of the Treasury Circular, Public Debt Series
No. 1-93)
AGENCY: Bureau of the Public Debt, Fiscal Service, Department
of the Treasury.
ACTION: Final rule.
SUMMARY: The Department of the Treasury ("Treasury" or "Department")
is issuing in final form an amendment to 31 CFR Part 356 (Uniform
Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds). This amendment includes changes
necessary to make fungible stripped interest components for Treasury
inflation-indexed securities, which the Department began issuing in
January 1997. In addition, the amendment makes certain technical
clarifications and conforming changes.
EFFECTIVE DATE: March 31, 1999.
ADDRESSES: This final rule is available for downloading from the
Bureau of the Public Debt's Internet site at the following address:
www.publicdebt.treas.gov. It is also available for public inspection
and copying at the Treasury Department Library, FOIA Collection,
Room 5030, Main Treasury Building, 1500 Pennsylvania Avenue, N.W.,
Washington, D.C., 20220. Persons wishing to visit the library should
call (202) 622-0990 for an appointment.
FOR FURTHER INFORMATION CONTACT: Kerry Lanham (Acting Director),
Chuck Andreatta or Kurt Eidemiller (Government Securities
Specialists), Bureau of the Public Debt, Government Securities
Regulations Staff, (202) 219-3632.
SUPPLEMENTARY INFORMATION:
I. Background
The Uniform Offering Circular (31 CFR Part 356) sets out the
terms and conditions for the sale and issuance by the Department of
the Treasury to the public of marketable Treasury bills, notes, and
bonds. The Uniform Offering Circular, in conjunction with offering
announcements, represents a comprehensive statement of those terms
and conditions./1/
/1/ The Uniform Offering Circular was published as a final rule on
January 5, 1993 (58 FR 412). The circular, as amended, is codified
at 31 CFR Part 356.
In January 1997, the Department began issuing a new type of
marketable security, referred to as a Treasury inflation-indexed
security, whose principal value is adjusted for inflation as measured
by the Bureau of Labor Statistics of the U.S. Department of Labor./2/
The Department believes the issuance of these new securities will
reduce interest costs to the Treasury over the long term and broaden
the types of debt instruments available to investors in U.S. financial
markets.
/2/ 62 FR 846 (January 6, 1997).
Treasury inflation-indexed securities have been eligible for
the STRIPS (Separate Trading of Registered Interest and Principal of
Securities) program since Treasury began issuing the new securities.
STRIPS is the Department's program under which eligible securities are
authorized to be separated into principal and interest components
(interest components are also referred to as "TINTS"). Such
components are maintained in book-entry accounts, and transferred
separately in the Treasury/Reserve Automated Debt Entry System
("TRADES" or the commercial book-entry system). Unlike TINTS from
Treasury fixed-principal securities, TINTS stripped from an
inflation-indexed security are currently not fungible (i.e., they are
not interchangeable) with TINTS stripped from a different
inflation-indexed security, even if the components have the same
maturity (payment) date./3/
/3/ See 31 CFR 356.31(f).
In the preamble to the final rule amendments to accommodate
the issuance of inflation-indexed securities, the Department stated
that it would "continue to work on making interest components fungible
in a manner that is operationally feasible."/4/ The Department
recognizes that making stripped inflation-indexed interest components
fungible is important to developing a liquid market for these
components. The Department has worked with market participants to
develop a methodology that will accomplish this goal.
/4/ 62 FR 846, 848 (January 6, 1997).
The Department published for public comment a proposed
amendment to the Uniform Offering Circular on December 8, 1997,/5/
which laid out the proposed methodology for making TINTS stripped from
different Treasury inflation-indexed securities fungible. The closing
date for comments was February 6, 1998. As explained in more detail
below, after considering the comments provided, Treasury has decided to
adopt the proposed methodology for making TINTS stripped from different
inflation-indexed securities fungible. This methodology will remain
unchanged from its description in the proposed rule. However, in order
to provide market participants sufficient time to make any necessary
automated systems changes, the effective date of this final rule will
be delayed until March 31, 1999.
/5/ 62 FR 64528 (December 8, 1997).
II. Comments Received in Response to the Proposed Rule
The Department received one comment letter on the proposed
rule, which was from The Bond Market Association ("Association")./6/
In developing the final rule, the Department took the issues raised in
this comment letter into consideration, as well as input received
during discussions with various active Treasury securities market
participants.
/6/ See letter from Ms. Paula H. Simpkins, Vice President and
Assistant General Counsel, The Bond Market Association (dated
February 6, 1998). This letter is available to the public for
inspection and downloading on the Internet, at the address provided
earlier in this rule, and for inspection and copying at the Treasury
Department Library, at the address provided earlier.
The Association generally supported the Department's efforts
to make TINTS of inflation-indexed securities fungible. The
Association, however, cited its members' concern with "the significant
modifications needed for their operational systems to accommodate the
trading and maintenance of the adjusted value of stripped interest
components to the penny." The Association said its members believe
"that it will require approximately six to nine months to both make
and test the appropriate system changes before they can begin trading
the new stripped securities." Association members, the commenter
said, also expressed concerns that these system changes could
complicate efforts already underway to make operational system
adjustments to prepare for the year 2000, the European Monetary Unit
and the General Collateral Finance Repo product of the Government
Securities Clearing Corporation. Similar concerns were expressed to
the Department in discussions with various active Treasury Market
participants. The Association suggested that Treasury consider
truncating the pennies from the adjusted values, so that the adjusted
values would be maintained in accounts and transferred in whole
dollars.
The Association supported establishing a conversion factor
between securities issued under different CPI base reference periods
if the Consumer Price Index's base reference period is changed. Such
a factor would enable TINTS from inflation-indexed securities issued
during different CPI base reference periods to be fungible.
However, the Association recommended that the conversion be done on a
voluntary basis so investors could decide whether the benefits
outweigh the associated costs of conversion. The Association also
recommended the creation of an additional conversion factor that
would allow TINTS of inflation-indexed securities issued during a
more-recent base period to be converted to an older base period.
This additional convertibility, the commenter asserted, would further
increase the marketability of the TINTS.
After taking the comments and views received into
consideration, the Department is issuing a final rule that adopts the
proposed rule without any significant changes. The suggestion to
truncate the pennies from the calculation of adjusted values was not
adopted because of the resulting payment differences to holders of
inflation-indexed TINTS as compared with holders of unstripped
inflation-indexed securities, particularly for smaller holders.
However, in order to provide market participants with sufficient time
to make any automated systems changes necessary for maintaining
accounts and transferring adjusted values in pennies, Treasury has
decided to adopt the recommendation of The Bond Market Association to
delay the effective date. Accordingly, the effective date of this
final rule will be delayed until March 31, 1999. In delaying the
effective date, the Department recognizes the significant efforts of
market participants in making systems changes for the year 2000
and the European Monetary Unit.
No changes are being proposed at this time to the current
STRIPS program for fixed-principal securities. However, as stated in
the preamble to the proposed rule, the Department will consider at a
later date the desirability of making changes to the minimum and
multiple requirements for fixed-principal TINTS similar to the
requirements for inflation-indexed TINTS, i.e., discontinuing the
$1,000 minimum-to-hold and multiple requirement, and permitting
fixed-principal TINTS to be held in amounts to the penny.
The suggestions to make conversions of adjusted values from
less-recent CPI base reference periods to more-recent base reference
periods voluntary, and to create an additional conversion factor to
facilitate conversions of adjusted values from more-recent periods to
less-recent periods, were also not adopted. The Department believes
that these suggestions, had they been adopted, would have been
operationally very complicated. They also would have continued to
make inflation-indexed TINTS not fungible to the extent that, in
either case, there would have to be different CUSIP numbers for
TINTS that have the same maturity (payment) date. The rule has been
amended, therefore, so that in the event that the CPI is
rebased, conversion to the most-recent base reference period will be
mandatory. At such time, Treasury will publish information specifying
the manner in which this conversion will be accomplished.
In addition, any new TINTS created from a security that was issued
during a prior base reference period will be issued with adjusted
values calculated using reference CPIs under the most-recent base
reference period.
The only other change in the final rule from the proposed rule
is to provide for mandatory conversion to fungible TINTS of any TINTS
created prior to March 31, 1999./7/ Treasury stated in the preamble
to the proposed rule that this conversion would occur because of the
Department's goal, where possible, to make all TINTS from inflation-
indexed securities fungible./8/ Also as stated in the preamble to the
proposed rule, Treasury will provide public notice, if necessary,
informing participants of the effective conversion date, along with
detailed instructions regarding the conversion to fungible STRIPS.
/7/ As of May 31, 1998, none of the currently outstanding inflation
-indexed securities has been stripped.
/8/ 62 FR 64528, 64530 (December 8, 1997).
III. Procedural Requirements
This final rule does not meet the criteria for a "significant
regulatory action" pursuant to Executive Order 12866. Although this
rule was issued initially in proposed form to secure the benefit of
public comment, the notice, public comment, and delayed effective date
provisions of the Administrative Procedure Act are inapplicable,
pursuant to 5 U.S.C. 553(a)(2).
As no notice of proposed rulemaking is required, the
provisions of the Regulatory Flexibility Act (5 U.S.C. 601, et seq.)
do not apply.
There is no new collection of information contained in this
final rule and, therefore, the Paperwork Reduction Act does not
apply. The collections of information in 31 CFR Part 356 have been
previously approved by the Office of Management and Budget under
section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C.
Chapter 35) under control number 1535-0112. Under this Act, an agency
may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a valid OMB
control number.
List of Subjects in 31 CFR Part 356
Bonds, Federal Reserve System, Government securities,
Reporting and recordkeeping requirements, Securities.
For the reasons set forth in the preamble, 31 CFR Chapter II,
Subchapter B, Part 356, is amended as follows:
PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS,
NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT
SERIES NO. 1-93)
1. The authority citation for part 356 continues to read as
follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12 U.S.C.
391.
2. Section 356.2 is amended by adding in alphabetical order
the definition of "Adjusted value" to read as follows:
§ 356.2 Definitions.
*****
Adjusted value means, for an interest component stripped from
an inflation-indexed security, an amount derived by multiplying the
semiannual interest rate by the par amount and then multiplying this
value by 100 divided by the Reference CPI of the original issue date
(or dated date, when the dated date is different from the original
issue date). (See Appendix B, Section IV to this part, for an example
of how to calculate the adjusted value for interest components
stripped from an inflation-indexed security.)
*****
3. Section 356.31 is revised to read as follows:
§ 356.31 STRIPS.
(a) General. A note or bond may be designated in the offering
announcement as eligible for the STRIPS program. At the option of the
holder, and generally at any time from its issue date until its call
or maturity, any such security may be "stripped," i.e., divided into
separate principal and interest components. A short or long first
interest payment and all interest payments within a callable period
are not eligible to be stripped from the principal component. The
CUSIP numbers and payment dates for the principal and interest
components are provided in the offering announcement if not previously
announced.
(b) Treasury fixed-principal securities. (1) Minimum par
amounts required for STRIPS. For a fixed-principal security to be
stripped into the components described above, the par amount of the
security must be in an amount that, based on its interest rate, will
produce a semiannual interest payment in a multiple of $1,000.
Exhibit C to this part provides the minimum par amounts required to
strip a fixed -principal security at various interest rates, as well
as the corresponding interest payments. Amounts greater than the
minimum par amount must be in multiples of that amount. The minimum
par amount required to strip a particular security will be provided
in the pressrelease announcing the auction results.
(2) Principal components. Principal components stripped from
fixed-principal securities are maintained in accounts, and
transferred, at their par amount. The principal components have a
CUSIP number that is different from the CUSIP number of the
fully-constituted (unstripped) security.
(3) Interest components. Interest components stripped from
fixed-principal securities are maintained in accounts, and
transferred, at their original payment value, which is derived by
applying the semiannual interest rate to the par amount. When an
interest component is created, the interest payment date becomes the
maturity date for the component. All such components with the same
maturity date have the same CUSIP number, regardless of the underlying
security from which the interest payments were stripped. All interest
components have CUSIP numbers that are different from the CUSIP
number of any fully-constituted security and any principal component.
(c) Treasury inflation-indexed securities. (1) Minimum par
amounts required for STRIPS. The minimum par amount of an
inflation-indexed security that may be stripped into the components
described in paragraph (a) of this section is $1,000. Any par amount
to be stripped above $1,000 must be in a multiple of $1,000.
(2) Principal components. Principal components stripped
from inflation-indexed securities are maintained in accounts, and
transferred, at their par amount. At maturity, the holder will receive
the inflation-adjusted principal value or the par amount, whichever
is greater. (See § 356.30.) The principal components have a CUSIP
number that is different from the CUSIP number of the fully-
constituted (unstripped) security.
(3) Interest components. Interest components stripped from
inflation-indexed securities are maintained in accounts, and
transferred, at their adjusted value, which is derived by multiplying
the semiannual interest rate by the par amount and then multiplying
this value by 100 divided by the Reference CPI of the original issue
date (or dated date, when the dated date is different from the
original issue date). See Appendix B, Section IV to this part, for
an example of how to calculate an adjusted value. The payment value
of any interest component created prior to March 31, 1999, will be
converted to its adjusted value. When an interest component is
created, the interest payment date becomes the maturity date for the
component. All such components with the same maturity date have the
same CUSIP number, regardless of the underlying security from which
the interest payments were stripped. The CUSIP number of any interest
component created prior to March 31, 1999, will be converted to the
fungible CUSIP number for the same maturity date. All interest
components have CUSIP numbers that are different from the CUSIP number
of any fully-constituted security and any principal component. At
maturity, the payment to the holder will be derived by multiplying
the adjusted value of the interest component by the Reference CPI of
the maturity date, divided by 100. See Appendix B, Section IV to
this part, for an example of how to calculate an actual payment amount
from an adjusted value.
(4) Rebasing of the CPI. In the event that the CPI is
rebased, the adjusted values of all outstanding inflation-indexed
interest components will be converted to adjusted values based on the
new base reference period. At such time, Treasury will publish
information specifying the manner in which this conversion will be
accomplished. Subsequent to rebasing, any TINTS created from a
security that was issued during a prior base reference period will
be issued with adjusted values calculated usingreference CPIs under
the most-recent base reference period.
(d) Reconstituting a security. Stripped interest and
principal components may be reconstituted, i.e., restored to their
fully-constituted form. A principal component and all related
unmatured interest components, in the appropriate minimum or multiple
amounts or adjusted values, must be submitted together for
reconstitution. Interest components stripped from inflation-indexed
securities are different from interest components stripped
from fixed-principal securities and, accordingly, are not
interchangeable for reconstitution purposes.
(e) Applicable regulations. Unless otherwise provided in
this part, notes and bonds stripped into their STRIPS components are
governed by Subparts A, B, and D of Part 357 of this chapter.
4. Appendix B to Part 356 is amended by revising the list of
section headings at the beginning of the Appendix to read as follows:
APPENDIX B TO PART 356--FORMULAS AND TABLES
I. Computation of Interest on Treasury Bonds and Notes.
II. Formulas for Conversion of Fixed-Principal Security
Yields to Equivalent Prices.
III. Formulas for Conversion of Inflation-Indexed Security
Yields to Equivalent Prices.
IV. Computation of Adjusted Values and Payment Amounts for
Stripped Inflation-Indexed Interest Components.
V. Computation of Purchase Price, Discount Rate, and
Investment Rate (Coupon-Equivalent Yield) for Treasury Bills.
*****
5. Appendix B to Part 356 is amended by redesignating Section
IV as Section V and adding a new Section IV to read as follows:
*****
IV. Computation of Adjusted Values
and Payment Amounts for Stripped
Inflation-Indexed Interest Components
Note: Valuing an interest component stripped from an
inflation-indexed security at its adjusted value enables this interest
component to be interchangeable (fungible) with other interest
components that have the same maturity date, regardless of the
underlying inflation-indexed security from which the interest
components were stripped. The adjusted value provides for fungibility
of these various interest components when buying, selling, or
transferring them, or when reconstituting an inflation-indexed
security.
Definitions:
C = the regular annual interest rate, payable semiannually, e.g.,
.03625 (the decimal equivalent of a 3-5/8% interest rate)
Par = par amount of the security to be stripped
Ref CPIIssue Date = reference CPI for the original issue date
(or dated date, when the dated date is different from the original
issue date) of the underlying (unstripped) security Ref CPIDate =
reference CPI for the maturity date of the interest component AV =
adjusted value of the interest component PA = payment amount at
maturity by Treasury
Formulas:
AV = Par (C/2)(100/Ref CPIIssue Date)
(rounded to 2 decimals with no intermediate rounding)
PA = AV (Ref CPIDate/100)
(rounded to 2 decimals with no intermediate rounding)
Example. A 10-year inflation-indexed note paying 3-1/2%
interest is issued on January 15, 1999, with the second interest
payment on January 15, 2000. The Ref CPI on January 15, 1999
(Ref CPIIssue Date) is 174.62783, and the Ref CPI on January 15,
2000 (Ref CPIDate) is 179.86159. Calculate the adjusted value and
the payment amount at maturity of the interest component.
Definitions:
C = .035
Par = $1,000,000
Ref CPIIssue Date = 174.62783
Ref CPIDate = 179.86159
Resolution:
For a par amount of $1 million, the adjusted value of each
stripped interest component is $1,000,000 (.035/2)(100/174.62783), or
$10,021.31 (no intermediate rounding).
For an interest component maturing on January 15, 2000, the
payment amount is $10,021.31 (179.86159/100), or $18,024.49 (no
intermediate rounding).
*****
6. Exhibit C to Part 356 is amended by revising the heading
to read as follows:
Exhibit C to Part 356 -- Minimum Par Amounts for Fixed-Principal
STRIPS
*****
DATED: June 26, 1998
Signed
Donald V. Hammond,
Acting Fiscal Assistant Secretary.